Key performance indicators in professional service firms

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1 Key performance indicators in professional service firms Oliver Grasl transentis management consulting GmbH & Co. KG Kranzplatz Wiesbaden mobile: August 2, 2009 Four major factors affect the performance of project based professional service firms: The ratio of senior to junior staff referred to as the firm s leverage, the average fee charged per unit of time, the percentage of billable time referred to as utilisation, and the profit margin. This paper takes a holistic approach to analysing the performance of a particular professional service firm with respect to these key performance indicators depending on the time senior staff allocates to the following tasks: Project acquisition and delivery, contact and customer maintenance, service innovation and development and hiring junior staff. Keywords: Professional Service Firms, Business model, Key Performance Indicators, Service Innovation 1 Introduction Four major factors affect the performance of project based professional service firms: The ratio of senior to junior staff referred to as the firm s leverage, the average fee charged per unit of time, the percentage of billable time referred to as utilisation, and the profit margin (Maister, 1997, p ). Maister (1997) refers to the first two factors as health factors and the latter to factors as hygiene factors, indicating that to become high-performers firms should concentrate on the health factors. A number of system dynamics studies have explored the behaviour of professional service firms, mainly concentrating on staff utilisation and leverage: Warren (1998) concentrates on resource dynamics and the implications of quality, Rode (2001) discusses 1

2 the reenforcing effects between a firm s reputation and the talents it can attract, Bayer and Gann (2006) discuss bidding strategies and workload dynamics and Kunc (2008) concentrates on finding the right staff ratios to ensure both short term demands (such as developing new business and delivering projects) and long term demands (such as developing junior staff) are met. This paper contributes by taking a holistic approach that analyses the performance of a particular professional service firm with respect to all of the four key performance indicators leverage, utilisation, fees and profit margin depending on the time senior staff allocates to the following tasks: Project acquisition and delivery. Contact and customer maintenance. Service innovation and development. Hiring junior staff. 2 The case study The case study reports from the German division of a global professional service firm that is a pioneer and a thought leader in a field of software development known as Agile software development. The firm has developed its own unique Agile adoption methodology by building on the extensive experience it has accrued over the past eleven years. This approach provides the firm s clients with the momentum and ready-to-use structure needed to go Agile. In addition, the firm also provide accelerated knowledge transfer and just-in-time learning services. The firm offers Management Consulting, IT Consulting and Global Sourcing to companies world-wide. The German division focuses on the banking and insurance, the aerospace, the telecommunication and the automotive markets. The currently has over 1100 employees worldwide and over 70 employees in Germany. This case study was carried out from August 2008 until March The main participants on the firm s side were the CEO and CFO of the German subsidiary. The head of business development and the branch heads where involved as needed. Conceptually the firm s business model ( the business idea ) operates as follows: The sales process starts with a concrete business opportunity. Both the number and quality of such business opportunities have improved in recent years through access to high-level contacts with budget-making power. Access to these contacts has improved due to both increased market credibility, through a sales partnership with a well-connected individual rain-maker, and a service partnership with a tool-vendor. The main driver for business opportunities is the product portfolio of both business and IT consulting services. If all goes well these business opportunities turn into concrete sales objectives and finally into IT solutions projects and business consulting projects 1. 1 The firm follows the Miller-Heimann sales process as discussed in Miller et al. (2005) and Miller et al. (2005), the terms Business Opportunity and Sales Objective are used accordingly. 2

3 These projects enable the firm s consultants to improve both their horizontal, technically oriented skills as well as their vertical, domain-oriented skills. These improved skills in turn help increase the firm s market credibility and refine its product portfolio, leading to new business opportunities. A causal loop diagram of this conceptual model is illustrated in Figure 1: Business Consultants with vertical domain knowledge Market Credibility Sales Partnership Hire new business consultants with vertical skills Business Consulting Projects New Business Consulting Products IT consulting products High Level Contacts with budget making power Concrete Business Opportunity Service Partnership IT consultants with horizontal skills IT consultants with vertical domain knowledge Concrete Sales Objective Hire new IT consultants with vertical domain knowledge IT Solutions projects Off Shore Development Center Figure 1: Conceptual model of the firm s business idea Analysis of the main causal loop shows that the following capabilities are important for the business model to be successful: Sales capabilities for business opportunity and sales objective management. Consulting skills for service delivery. Know-How management, Innovation management and product development skills for creation of up-to-date consulting products. Management skills to ensure that products developed match both market requirements and consultant skills. The firm s main issue in operationalising its business model is how to divide these responsibilities among its senior consulting staff: 3

4 Should selling be done by dedicated sales specialists, or by the firm s most senior consultants, the principal consultants? Is product development done by principal consultants who work on consulting projects, or by an in-house think-tank of senior consultants that have no other responsibilities? Whose responsibility is it to transfer new product know-how to more junior consultants? Which goals and incentives should be set for the principal consultants? The firm had been discussing theses issues for some time when the study began and was particularly drawn to the ideas discussed by Maister (1997) on managing professional service firms In particular the formula for the professional services detailed in Maister (1997)[p ] had been found highly relevant: P rofit P artner = P rofits F ees F ees Hours Hours Staff Staff P artners = Margin V alue Utilisation Leverage (1) It was quickly decided by the stakeholders that improving the margin was an operative hygiene measure and that business model analysis should focus on the key performance indicators value, utilisation, and leverage. An early analysis depicted in Figure 2 showed that these KPI s are highly dependent and that clear policies are needed concerning allocation of principals time to sales, project delivery, innovation and standardisation: Utilisation depends both on the effort a typical project has as on the number of consultants involved in a project (the project leverage). The project leverage is dependent on product standardisation if the content of every project is unique then only high-skilled consultants can delivery them, leading to lower leverage. The value (fees) that can be generated by a project depends on how innovative the consulting product is. High product innovation is detrimental to product standardisation, both at the level of selling the product in a standardised way as at the level of delivering it in a standardised way. Standardising products also means that know-how has to be transferred to consultants, which is a further burden on principals time. Based on the discussion above, the following strategic question was formulated: 4

5 Gross Margin Value Leverage - Utilization - Project effort sold Product innovation Consultants Principals Client Maintenance effort Project leverage Consultants a Principal can manage - New client acquistion effort Staff Issues Organizational Standards Delivery Standards - Standardized Products Standardization Effort Delivery standardization effort needed Knowledge Transfer effort needed Consultant management effort Maximum Principal time available Figure 2: Dynamic interdependencies between KPI s Strategic Question 2.1 Which organisational policies should be followed to ensure value is maximised within the firm s business model, and how should these policies be operationalised within the organisation? In particular this means finding an answer to how effort should be distributed between the following tasks, given the current market and customer situation: Generating repeat business through client maintenance New customer acquisition Attention to project delivery Recruitment and consultant development Development of new consulting products 2.1 Products and transactions The firm s products are IT consulting services that are sold and delivered in the form of projects. Two kinds of projects are distinguished: Fixed price projects and time and material projects. Sales figures show that fixed price projects are much more difficult to 5

6 sell, but they offer better scalability and higher returns due to the increased risk. Time and material projects have better sales figures and are low risk, but mostly consist of a single consultant only and thus offer little scalability. The company distinguishes between delivery projects (which are fixed price) and the time and material IT consulting and Solution projects. IT consulting projects are lowknow-how projects with little profile, solution projects are high-profile, high-know-how projects. All projects are acquired by heads of branch and principal consultant resources and are delivered by principal consultants (who take the project lead) and consultants. It is a business policy that a principal consultant should not be involved in more than two projects at a time. The firm s products are shown in Figure 3. «resource» Principal «Transaction» deliv er consulting serv ices manages 1 acquires <3 is delivered via «Service» IT consulting serv ices acquires «resource» Head of Branch is sold via «Transaction» sell consulting serv ices «Service» Fixed Price Project «Service» Time and Material Project «Price» T&M Budget Person Days Daily Rate «Price» Fixed Price Budget Fixed Price Charge «Service» deliv ery project «Service» consulting project «Service» solution project is part of 1..* «resource» Consulting Staff Member 1 provides provides 1 Figure 3: The firm s products The main transactions the firm engages in are: Sell consulting services Consulting services are sold by the heads of branch and the principal consultants. Delivery consulting services Consulting services are delivered by principals and consultants. Maintain business relationships Consulting services are mostly sold to long standing business relationships. Maintaining business relationships is therefore a core transaction in the business model. Business relationships are maintained by the heads of branch and the principal consultants. Business relationships include contacts who may become customers and all current customers. 6

7 Hire consultants The firm works with few freelance consultants, making the hiring process even more important. Fire consultants The firm has a fairly high fluctuation and so firing consultants is rarely necessary in practise. A firing policy is currently not included in the model. 2.2 Business model dynamics The dynamic view of the firm s business model examines how the elements of the structural model (such as customers, consultants and projects) are changed by the business transactions (such as selling projects, hiring and firing consultants) in the behavioural model. The structural and behavioural model therefore form an important basis for developing and validating the dynamic model. A high-level overview of the firm s dynamics is depicted in Figure 4 and briefly discussed here. The details of each module are discussed subsequently: Principals The principals are the firm s most senior consultants. Their top priority is writing proposals that bring new revenue. The remaining time is spent hiring and firing consultants, managing and working in projects, maintaining business contacts and creating and standardising new consulting products. Their central role in the business model is evident from Figure 4: The principal module is the only module that is connected to all other modules. Contacts Each principal maintains a list of qualified contacts, who provide leads that may ultimately lead to new projects and customers identifying, qualifying and maintaining contacts costs principal s time, which is then not available for project work and consultant management. If the partners invest to little time in their contacts the number of contacts diminish, ultimately reducing the number of leads generated. Projects Principals are also responsible for following up on leads, writing proposals and winning new projects. Projects may be won from new customers or from current customers (i.e. new business or repeat business). In the firm s experience winning a new customer is much harder than winning repeat business from a current customer, a fact that is reflected in the model via two distinct sales pipelines, one for new customers and one for repeat business. The firm just has one product ( consulting projects ) projects are characterised by total project effort and the average team size deployed. Consultants Consultants are needed to delivery projects and are hired and fired by a full time recruitment officer, assisted by the principals. The hiring policy is driven by a yearly consultant growth target. This target is set by senior management and is independent of immediate demand for consultants by projects the target 7

8 is modelled as a constant, the target setting mechanisms are currently not considered. A consultant fluctuation rate is included in the model, consultant growth is constrained by a maximum principal to consultant ratio (the maximum leverage ). Customers The customer module discerns between new and mature customers: New customers require a higher maintenance effort, mature customers are more likely to purchase substantial solution projects. Customers are maintained by principals, thus cutting back even further the time principal have for project work. It is assumed in the model that customers have a very long life time. Products Principals are responsible for product development. This follows a simple process: Innovative ideas that arise in projects are developed into mature, marketable products. Only marketable products lead to consistently high consulting fees. To ensure high leverage in projects (i.e. deployment of more junior consultants as opposed to principals) these products must be standardised and knowledge transferred from principals to consultants. Value Value is calculated via two gross margins: The Gross_Margin_I represents revenues minus direct project costs (which in this model is equivalent to the consultants wages), Gross_Margin_II is equal to Gross_Margin_I less the sales costs. Projects Value Customers - - Consultants Principals - - Contacts Products Figure 4: High-Level dynamics of the firm s business model 8

9 2.2.1 Principal Dynamics In the current model, the total number of principals consultants is constant. Currently the firm has fourteen principals (including the four heads of branch) and only 45 consultants in the initial setting as the desired principal to consultant ratio Maximum_Leverage is initialised to 20, this restriction is acceptable and does not affect the analysis: T otal_p rincipals = P rincipals Heads_of_Branch (2) The principals are involved in all major business processes, therefore the main task of the principal module is to manage and track principals allocation of effort to these processes. Principals allocate their time according to the following prioritisation: 1. Writing proposals 2. Hiring consultants 3. Working in projects (project management and architectural work) 4. Contact Maintenance (lead generation and client maintenance) 5. Product development The maximum time principals can allocate is calculated as: M ax_p rincipal_w ork_ef f = T otal_p rincipals (3) Average_P rincipal_w ork_ef f The principals number one priority is to write proposals, in the extreme case they allocate all their time to this task: M ax_p rincipal_p roposal_ef f = (4) M ax_p rincipal_w ork_ef f In most scenarios the actual time allocated to writing proposals is less, the remaining time is allocated to the next most prior task, hiring consultants: M ax_p rincipal_hiring_ef f = M ax_p rincipal_w ork_ef f (5) P rincipal_w ork_ef f 9

10 The remaining time is shared between projects, contact maintenance, and product development. As either of these tasks could be a full time task, the principals have to make a conscious decision concerning their allocation of time between these tasks, leading to the following equations: M ax_p rincipal_p roject_ef f = (6) M AX(M ax_p roject_t ime_share (M ax_p rincipal_hiring_ef f Hiring_Eff), 0) M ax_contact_m aintenance_ef f = (7) M AX(M ax_contact_m aintenance_t ime_share (M ax_p rincipal_hiring_ef f P rincipal_p roject_ef f), 0) M aximum_p roduct_ef f = (8) MAX(0, M ax_p rincipal_hiring_ef f P rincipal_p roject_ef f Contacting_Ef f) These dynamics are illustrated in Figure 5. Contacts.Contacting Effort Contact maintenance effort Heads of Branch Customers.Customer maintenance effort Maximum Product Effort Projects.Principal Project Effort Principals Total Principals Maximum Project Time Share Consultants.Hiring Effort Projects.Principal Proposal Effort Maximum Principal Project Effort Maximum Contact Maintenance Effort Average Principal Work Effort Maximum Principal Work Effort Maximum Principal Proposal Effort Maximum Principal Hiring Effort Maximum Contact Maintenance Time Share Figure 5: High-Level dynamics of principal submodule Contact Dynamics Contacts are the basis for lead generation. They follow a fixed life cycle: First they need to be identified. At this stage a contact is literally just that: contact information belonging to a person that may be a potential client of the firm. Identifying contacts takes 10

11 time (duration) the effort is not accounted for separately though, as contacts are mostly identified while performing other activities (such as working in projects). In the current model the only source for new contacts are new customers, as most new contacts are made within projects. Other sources could easily be added, but this does not seem necessary as there is no bottleneck here. Once contacts have been identified, they need to be qualified: Not all contacts are potential new customers. Contact qualification requires conscious principal effort and is therefor constrained by Max_Contact_Qualification_Rate (which in turn depends on the time principals have available for contact maintenance) and takes a minimum amount of time Min_Qualification_Dur. Only a certain fraction of identified contacts Contact_Qualification_Frac actually qualify. These leads to a dynamic qualification rate Contact_Qualification_Rate. This rate is constrained by the fact that a principal can only manage a limited amount of qualified contacts (Max_Qualified_Contacts_Per_Principal=50 in the initial setting). To remain qualified contacts require principals maintenance time, otherwise they fall back to the identified stage. Identified contacts also have a finite lifetime, defined by Identified_Contact_Lifetime. These dynamics are illustrated in Figure 6. Minimum Qualification Duration Maximum qualified contacts Qualified Contacts Required Contact maintenance effort Qualified contact maintenance effort Qualification Fraction Contact qualification Qualified rate Contact loss Maximum Qualification rate Qualified Contact Lifetime Contact identification Identified Contacts Identified contact loss new customer contact potential identification duration Customers.New Customers identification fraction Identified contact lifetime Figure 6: High-Level dynamics of contact submodule 11

12 2.2.3 Project Dynamics The project dynamics module is by far the most complex module of the dynamic model: It contains three separate project acquisition and delivery chains (one chain for each product: delivery projects, solution projects and consulting projects) and the accounting mechanisms that track the effort needed from consultants and principals during project acquisition (e.g. writing proposals) and project delivery. Structurally the chains are identical, but the actual acquisition and delivery rates differ for each project type and are matched to the firm s sales figures with respect to these project types. The structure of the model will be described here using the project chain for delivery projects. The project chain models the life-cycle of a project beginning at the initial lead, which turns into a concrete proposal, then into a project that has been won, and finally into a project that is delivered and completed. The chain has two parallel sub-chains: One sub-chain is for projects that are won from new customers ( first time customer sub-chain ), the second sub-chain is for projects that are won from mature customers ( repeat customer sub-chain ). The lead generation rate for first time customers First_Time_Delivery_Lead_Generation depends directly on the current number of Qualified_Contacts, the fraction of leads generated from these contacts First_Time_Delivery_Lead_Fraction and the time it takes to generate these leads First_Time_Delivery_Lead_Generation_Duration. There are two further influences to the first time lead generation rate: The Lead_Generation_Pressure and the Effect_of_Delivery_Project_per_Principal: The Lead_Generation_Pressure represents the idea that the pressure to generate leads goes down once the targets set by management are achieved. In this case case the incentive to generate leads is a financial reward that is not capped therefore there is always an incentive to generate more leads. For this reason Lead_Generation_Pressure is set to 1 in this model. The Effect_of_Delivery_Project_per_Principal arises due to the fact that the number of projects a principal can manage cannot become too large and is set to Ef f ect_of_delivery_p roject_per_p rincipal = (9) MAX(0, MIN(3 2 Delivery_P roject_per_p rincipal, 1)) This ensures that the incentive to generate new leads goes down once each principal is responsible for one delivery project on average. Leads must be further qualified to get to the next stage in the sales process, delivering proposals. Qualifying leads does not require any effort, but the qualification process has a fixed duration of Delivery_Lead_Closing_Duration days. Of course not all leads actually reach the next stage only the fraction defined by First_Time_Delivery_Lead_Success_Fraction do. This is a constant that is set using historical values derived from the firm s sales figures. Once a project has reached the proposal stage, a large amount of principals effort is required to move things forward and actually win the project: The less time principals 12

13 can invest in writing and closing proposals, the longer this process will take. As writing proposals is the principals top priority, the time a principal can invest on a proposal only depends on how many proposals he is currently involved in, i.e. the share of his proposal time he can devote to a particular proposal, Delivery_Proposal_Effort_Share. This effort share is calculated as the share of effort required for delivery proposals compared to the total effort required for proposals: Delivery_P roposal_ef f ort_share = (10) Required_Delivery_P roposal_ef f ort Required_P roposal_ef f ort P rincipal_delivery_p roposal_ef f ort = (11) P rincipal_p roposal_ef f ort Delivery_P roposal_ef f ort_share The dynamics of writing proposals are illustrated in 7: Depending on the Delivery_Lead_Success_Rate and the Effort_per_Delivery_Proposal the effort required to close all proposals accumulates in the stock Delivery_Proposal_Effort. Required_Delivery_P roposal_ef f ort = (12) Delivery_Lead_Success_Rate Ef f ort_per_delivery_p roposal P rincipal_p roposal_ef f ort = M AX(M IN(Required_P roposal_ef f ort, P rincipals.m aximum_p rincipal_p roposal_ef f ort), 0) The more effort Principal_Delivery_Proposal_Effort that Principals invest into writing proposals the faster proposals are written and closed: Delivery_P roposal_w riting_rate = (13) P rincipal_delivery_p roposal_ef f ort Ef f ort_per_delivery_p roposal But the closing rate Delivery_Proposal_Closing_Rate does not only depend on the time principals have available: There is also a fixed minimum duration Minimum_- Duration_Per_Delivery_Proposal involved. This variable depends on many exogenous influences and is therefor set to a constant of 40 days. Delivery_P roposal_closing_rate = (14) MIN(Minimum_Duration_P er_delivery_p roposal 1, Delivery_P roposal_w riting_rate) 13

14 Delivery Proposal Effort New Delivery Proposal Effort Delivery Proposal Writing Effort Delivery Proposal Closing Rate Delivery Proposal Writing Rate Principal Delivery Proposal Effort Delivery Proposal Effort Share Principal Proposal Effort Minimum Duration Per Delivery Proposal Required Delivery Proposal Effort Effort Delivery Lead Success Rate per Delivery Proposal Delivery Project effort Delivery Proposal Effort Fraction First Time Delivery Lead Success Repeat Delivery Lead Success Figure 7: Dynamics of writing proposals In addition, only a constant fraction First_Time_Delivery_Proposal success fraction of projects are actually won. This constant was again derived from the firm s sales figures. Once projects are won, they wait Average_Time_To_Delivery_Project_Start time until they are started. Then delivery commences and proceeds at a rate Delivery_Project_Completion_Rate. Project acquisition and delivery dynamics are illustrated in Figure 8. The delivery rate Delivery_Project_Delivery_Rate depends on how much delivery capacity is available (i.e. how many consultants are available for project work), and how much of this capacity is devoted to the current project. The maximum delivery capacity Maximum_Delivery_Rate is determined by the number of consultants and principals available for project work. M aximum_delivery_rate = M aximum_consultant_w ork_ef f ort (15) M aximum_p rincipal_p roject_ef f ort The actual delivery rate may be smaller than maximum capacity though: Depending on how many projects are in the pipeline, the current demand for consulting power Demand_Delivery_Rate may be smaller than the current capacity: Actual_P roject_delivery_rate = (16) M AX(M IN(M aximum_delivery_rate, Demand_Delivery_Rate), 0) 14

15 Repeat Delivery Lead Fraction Customers.Mature Customers Repeat Delivery Leads Repeat Delivery Proposals Delivery Project effort First time delivery lead generation duration Repeat Delivery Lead Generation Customer Delivery Lead Generation duration Products.Project Leverage Lead Generation Pressure Repeat Delivery Lead Loss Effect of Delivery Project per Principal Delivery Project per Principal First Time Delivery Leads Repeat Delivery Lead Success Delivery Lead Closing Duration Repeat Delivery Proposal Loss Repeat Delivery Lead Success Fraction First Time Delivery Proposals Repeat Delivery Proposal Success Delivery Proposal Closing Rate Repeat Delivery Proposal Success Fraction Delivery Projects won Average Time To Delivery Project Start Active Delivery Projects Delivery Project effort First time delivery lead fraction First Time Delivery Lead Generation Contacts.Qualified Contacts First Time Delivery Lead Success First Time Delivery Lead Loss Delivery Lead Closing Duration First Time Delivery Proposal Loss First Time Delivery Lead success fraction First Time Delivery Proposal success Delivery Proposal Closing Rate Delivery Project start First Time Delivery Proposal success fraction Delivery Project completion Delivery Project Delivery Rate Figure 8: High-Level dynamics of project acquisition and delivery The demand delivery rate is simply calculated from the staff requirements for each project category: Demand_Delivery_Rate = Average_W ork_rate (17) (Delivery_P rojects_staf f_n eeded Consulting_P rojects_staf f_n eeded Solution_P rojects_staf f_n eeded) In practice, projects mostly begin even if full man-power is not yet available, so it is acceptable to allocate delivery capacity evenly between projects. So, putting all this together, the Delivery_Project_Completion_Rate can be modelled as follows: Delivery_P roject_completion_rate = Actual_P roject_delivery_rate (18) Delivery_P rojects_staff_needed T otal_p roject_staf f_n eeded Project effort accounting structures are illustrated in Figure 9. 15

16 Delivery Project per Principal Principals.Principals Active Delivery Projects Consultants.Consultants Products.Project Leverage Active Delivery Projects Total Consulting Staff Maximum Consultant Work Effort Maximum Delivery Rate Principals.Maximum Principal Project Effort Delivery Projects Staff needed Consultants needed Active Consulting Projects Total Project Staff needed Consulting Projects Staff needed Demand Delivery Rate Average work rate Consulting Project Leverage Solution Projects Staff Needed Active Solution Projects Actual Project Delivery Rate Maximum Consultant Work Effort Principals.Maximum Principal Work Effort Principal Project Effort Utilization % Solution Project Leverage Total Project Staff needed Consulting Projects Staff needed Solution Projects Staff Needed Solution Project Delivery Rate Delivery Project Delivery Rate Delivery Projects Staff needed Consulting Project Delivery Rate Figure 9: Project effort accounting Consultant Dynamics Consultant dynamics are simple compared to the project dynamics: The initial number of consultants is set to 45, the number of consultants varies according to the fluctuation rates and hiring rates. Active firing of consultants is not considered in this model, as this rarely occurs in practice. The fluctuation rate is a constant that is set to 20% per year. The hiring rate depends on a number of factors: The firm sets an annual consultant growth target which is also a constant of 20% per year in the current model. Another factor influencing the hiring rate is the number of consultants needed due to projects that have already been sold this factor Consultants_Needed is defined in the projects module. The next factor influencing the hiring rate is the maximum consultant leverage Maximum_Leverage a principal can achieve: This represents the number of consultants a principal can manage next to his client maintenance and project acquisition and delivery effort. Currently Maximum_Leverage is set to 20 (at least two senior consultants and up to 18 junior consultants). Finally the hiring rate also depends on the average time it takes to hire a new consultant, defined by Average_Hiring_Duration in the model. This constant value is set to 60 days in the model. Hiring_Rate = M AX(M IN(M AX(Consultant_T arget, Consultants_N eeded), (19) 16

17 P rincipals M aximum_leverage) Consultants, 0) Average_Hiring_Duration 1 Consultant dynamics are illustrated in Figure 10. Projects.Consultants needed Annual Consultant Growth Target % Hiring Effort per Hire Hiring Effort Consultant Target Consultants Fluctuation Rate Hire Rate Fluctuation Principals.Maximum Principal Hiring Effort Average Hiring Duration Maximum Leverage Principals.Principals Lev erage Figure 10: Consultant dynamics Customer Dynamics Customer dynamics are kept simple: The model differentiates between new customers and mature customers. The differentiation is necessary because some services (such as delivery projects) cannot be sold to new customers. A new customer is recorded every time a service is sold successfully to a new customer. Effort must be spent on customer maintenance to ensure customers are not lost. New customers that are successfully retained become mature customers after the MATUR- ING_DURATION, whose initial setting is 216 days (i.e. one year). Once customers are mature they again require maintenance effort to ensure they are not lost. Customer maintenance is done by principals. Their maximum time available for contact maintenance is allocated between new and mature customers proportionally. Customer dynamics are illustrated in Figure

18 Total Customers New Customers Mature Customers Customer acquisition Customer maturing Customer attrition Customer Project Conversion Maturing duration New customer loss Mature customer loss Customer Lifetime Projects.First Time Solution Proposal Success Projects.First Time Delivery Proposal success Customer errosion time Projects.First Time Consulting Proposal Success Required new customer maintenance effort Required mature customer maintenance effort New customer maintenance effort per customer New customer contact maintenance effort share New customer contact Mature customer contact maintenance effort maintenance effort Mature customer maintenance effort per customer Principals.Maximum Contact Maintenance Effort Customer maintenance effort Figure 11: Customer dynamics Product Dynamics Product (or service) innovation is the responsibility of the principal consultants. The product life-cycle follows a simple pattern which is modelled as a product development chain: New ideas are considered innovation products. Some ideas are rejected, others are developed into Marketable_Products. Marketable products are products that can be marketed to customers and can be delivered by the principals involved in product development. To ensure high leverage in projects these products must be standardised into Standardized_Products. Creating an innovation product requires effort, determined by the constant Required_- Product_Innovation_Effort. Depending on the time Product_Innovation_Effort principals allocate to product innovation, the innovation rate is calculated as P roduct_innovation_rate = P roduct_innovation_ef f ort Required_P roduct_innovation_ef f ort (20) Similar equations hold for product development and standardisation rates. Depending on the typical P roduct_lif etime, products become obsolete. A simple model of the product life-cycle is illustrated in Figure 12. Though the firm s product development process is not formalised, this fits well into processes described in literature (Young, 1961, p. 249). In the current model only the time required by principal consultants is considered, time required by consultants for training is omitted. On the basis of the product life cycle two key performance indicators can be determined: 18

19 Principals.Maximum Product Effort Product Marketing Effort % Product Standardisation Effort % Product Innvoation Effort % Product Standardisation Effort Required Product Product Innovation Effort Product Marketing Effort Marketing effort Required Product Standardisation effort Product Lifetime Required Product Innovation Effort Innovation Product Marketable Product Standardised Product Product Innovation Rate Product Marketing Rate Product Standardization Rate Product Obsolescence Rate Innovation Reject Marketing Reject Innovation Reject Fraction Development Reject Fraction Innovation Reject Duration Development Reject Duration Figure 12: Product dynamics Time to market This measures the average time it takes from the conception of an innovative idea to the creation of the marketing materials and reference projects that are needed to successfully sell projects based on the idea. Time to standardisation This measures the average time it takes from the conception of an innovative idea to the creation of training materials and the training of junior consultants that is necessary to ensure projects based on the new idea can be delivery by junior consultants. It is assumed that the time to market of innovative ideas has an effect on the average consulting fee that can be realised by the firm, and that time to standardisation has an effect on the project leverage these causal effects are mentioned in Maister (1997, p. 38) and are part of senior staffs mental model, but no thorough analysis or study showing this effect could be found in literature. A recommendation was made to senior management to set up a measurement program to validate the model. The effect of time to standardisation on project leverage was modelled as illustrated in Figure 13: Project leverage is modelled as a stock that can fall as low as Minimum_P roject_leverage and rise as high as M aximum_p roject_leverage, depending on the flows Leverage_W in and Leverage_Loss. If T ime_to_standardisation is too long, then Leverage_W in is zero and Leverage_Loss is positive, leading P roject_leverage to diminish at a rate determined by the P roject_leverage_adjustment time. But if T ime_to_standardisation is short (smaller than a constant defined by T ime_to_standardisation_excellence), then Leverage_W in is positive and Leverage_Loss is zero. So when 19

20 T ime_to_standardisation < T ime_to_standardisation_excellence (21) this leads to the following equation for Leverage_win (the equations for Leverage_- Loss are the exact opposite): Leverage_win = M AX((M aximum_p roject_leverage P roject_leverage)/leverage a djustment t ime, 0) (22) The fee level dynamics are modelled analogously. Maximum Project Leverage Project Leverage % Minimum Project Leverage Project Leverage Time to standardization excellence Leverage win Leverage loss Product Standardisation Effort Time to standardisation Leverage adjustment time Required Product Standardisation effort Figure 13: Project leverage dynamics Value Dynamics The value generated is calculated via two gross margins Gross_margin_I and Gross- _margin_ii via the following formulae: Gross_M argin_i = Revenue Consultant_Cost (1 T ravel_expense_% ) (23) 100 Gross_M argin_ii = Gross_M argin_i Sales_Cost (24) The revenue is accumulated daily from the consultant fees earned in project delivery. The consultant costs are accumulated from daily principal and consultant wages and the monthly bonus. The sales cost is accumulated from daily head of branch wages. 20

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